This type of question is e-mailed to me rather frequently:
"How do you manage your finances so that you make sure that you do not run out of money?"
If you are retired or looking forward to this next phase of your life, that is a question you have asked yourself. Everybody asks this question. Regardless of how well you have planned or how well you think you are positioned for life without a regular paycheck, you wonder and worry. I am 19 years into my retirement lifestyle, and I still ask this question on occasion, though much less often.
Here is the unfortunate reality: there is no way to make sure you do not run out of money. We live in an inter-connected world. What happens in China or Europe can have a straightforward impact on our financial status. Obviously, whatever wind is blowing, the folks in Washington blow through your life. Decisions in your state capital and even local government mandates are not without consequences.
The days when most of us lived on a farm or in a small, self-contained community where we were much more in control of our own financial destiny are gone and never coming back. We are at the mercy of many forces that we cannot control or even predict with much accuracy.
So, as we move through or try to plan for retirement, we are really in a Catch 22 situation. I like part of Wikipedia's definition: A Catch-22 often result from rules, regulations, or procedures that an individual is subject to but has no control over.
So, what's a conscientious person to do? Simply, the best we can with what we have available. Over the past few years, I have written several posts that deal with the importance of taking personal responsibility for our financial well-being. Here are a few excerpts from a couple of those posts:
"Financially, we must take control of our own money. If your bank is treating you poorly or layering on the fees, move to another bank or credit union. If you are comfortable with an Internet bank, go for it. If you have a financial advisor or stockbroker, are you confident he or she understands your desires, your risk tolerance, and your goals? Sit down with them and review your account—question everything that doesn't make sense to you. If you are unhappy, give that person new marching orders or switch to someone else.
We can't afford to be uninformed about the world of money. If you don't use a budget, start. If you have no idea how much interest your credit card company charges, find out. If you don't understand your pension or IRA, use the Internet to get educated. If you don't understand some aspect of the financial world that affects you, ask questions, and get answers you can understand. If you still believe these folks are really looking out for your best interests and ignorance is bliss, then you are likely heading toward a rude awakening.
The government may be unable to figure out how to tame a deficit, but luckily we are quite a bit smarter. We can choose to not spend more than we make. It is easy to eliminate things from our life that cost more than they are worth to us. We understand we can't afford every want when we want it. Instant gratification is a freeway to financial ruin. Simplifying our lifestyle, cooking more meals at home, using coupons, and shopping grocery store specials can save hundreds, if not thousands of dollars a year.
We control how much we spend on travel, leisure, and entertainment. Leading a satisfying retirement is really about making smart choices. If you have saved enough money for the 12 day Caribbean cruise and it is important to you, take it. If you don't have the money, then stay off the ship. Spend the time finding things going on around you that are free or very low cost. Unlike the government, we don't have to spend money we don't have."
Another post focused on how our parents and grandparents lived. I suggested several of these approaches would work for us today:
- Waste Not, Want Not.
- Pull Yourself Up by Your own Bootstraps and Keep your Nose to the Grindstone.
- A penny saved is a penny earned.
- Keep your nose out of other's business.
- Don't Cry Over Split Milk. The Past is Past.
So, the answer to the question, "How do you manage your finances so that you make sure that you do not run out of money," is actually quite simple. Let me reduce it to these five steps:
1. Save at every opportunity, both before and after retirement. If you think you are saving enough, you are probably wrong. Save more.
2. Spend as if you have less than you do. Under-consumption and living beneath your means are the two essential steps to financial well-being.
3. Take responsibility for your financial future. The minute to stop paying attention or turn it over to someone else is the moment your future is at risk.
4. Realize you have much less control than you think you do. It will help you stay sane in an insane world.
5. Enjoy your life with whatever resources you have. The biggest lie we tell ourselves would begin with the words, " if only I had enough money, I'd..." As far as money is concerned, there is no finish line. There never is a time when you can say, "now I have enough money, so now I'll be happy."
Of course, nothing this important is as simple as just following five steps. But it is a good start.